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Selling something like this, even at a firesale price, is likely to take a very long time. So long that you're likely to get a knock from Uncle Sam before you g

by Alupis 10y ago

Selling something like this, even at a firesale price, is likely to take a very long time. So long that you're likely to get a knock from Uncle Sam before you get all this cash you're talking about. Inheriting something like this is not a bed full of roses. It can become quite a nightmare, and it can indeed ruin people who are not prepared to take on that kind of tax liability all at once without any up-front funds to pay it off.

maxerickson 10y ago
Yes, it is quite fascinating that people are building up $6-7 million operations without having any cash in reserve at all.
- Alupis 10y ago
  The part you seem to be missing is that the business might be valued at $6-7 million on paper, but it does not generate anywhere near that in annual revenue, let alone profits. We already acknowledged what makes up that on-paper value. Most of these family farms are more-or-less "lifestyle businesses"... ie. the family owns and operates the farm for a living, and profits only a normal salary annually after all expenses (equipment, repairs, employees, materials, etc)... which is spent on regular things such as toothpaste, toilet paper, shoes, food, etc. Just like most people, they aren't banking millions per year... Farming in America is incredibly expensive... but not incredibly lucrative. There are exceptions to this, with mega-corp-farms and what-have-you... but that's not who we're talking about here.
  - maxerickson 10y ago
    The federal estate tax on a $6 million farm would be roughly $200,000. You don't need to be making enormous profits to plan for that. You'd certainly need to be making a decent return, but it doesn't take such a huge amount of annual profit to set aside enough to cover it. What you seem to be missing is that I am really skeptical that people are gathering $6 million of paper wealth without plowing hundreds of thousands of dollars of profits into growing their operations. Maybe some unlucky lucky guy inherited a lot of land that then appreciated a great deal. The horror.
    - AnimalMuppet 10y ago
      If I understand correctly, it's more like this. You make $50,000 in a good year. When you have to plow money into the operation, you borrow the money to do it. You're able to make payments on this, and that's about all. Putting aside $200,000 in that environment would be pretty hard.
      - maxerickson 10y ago
        How does such a bleak operation get so big?
        AnimalMuppet 10y ago
        Because all the smaller ones couldn't make it. If you only had $2 million in value, you were making less than $20,000 a year, and couldn't support a family at all. (All numbers are made up, but I think the order of magnitude is about right.) So the people with operations that size sold out, and others borrowed money to buy that land, so that they could get up to the level where they're making $50,000 a year and can support a family. (They were able to borrow money on the land, because despite 2008, farmland has not been decreasing in value - or at least not much, so banks are willing to make the loan, because they have good collateral.) That's the mechanics of how they got that big. As for the "why would rational people ever take that deal" question, I think it's because some people really feel an attachment to the land, to the lifestyle, to the ideal of a family farmer, to family tradition, or some combination thereof.
        maxerickson 10y ago
        The table "Principal farm operator household finances, by ERS farm typology, 2015" here provides a slice of information: https://www.ers.usda.gov/data-products/farm-household-income-and-characteristics/ https://www.ers.usda.gov/data-products/farm-household-income... Many farmers are making small amounts or losing money. They appear to mostly have farm assets less than $1 million. But when you get to the commercial class (still households), with median farm assets of $2.7 million, they are making median farm income of $146,000; with mean farm assets of $4.1 million, they are making mean farm income of $250,000, which is not the 1% of assets you propose. There is of course much room for variation inside the data, but it appears that many large farms are able to generate a nice return on assets, even at farm sizes smaller than would be subject to current estate taxes.

by Alupis 10y ago

maxerickson 10y ago

Yes, it is quite fascinating that people are building up $6-7 million operations without having any cash in reserve at all.

Alupis 10y ago
The part you seem to be missing is that the business might be valued at $6-7 million on paper, but it does not generate anywhere near that in annual revenue, let alone profits. We already acknowledged what makes up that on-paper value. Most of these family farms are more-or-less "lifestyle businesses"... ie. the family owns and operates the farm for a living, and profits only a normal salary annually after all expenses (equipment, repairs, employees, materials, etc)... which is spent on regular things such as toothpaste, toilet paper, shoes, food, etc. Just like most people, they aren't banking millions per year... Farming in America is incredibly expensive... but not incredibly lucrative. There are exceptions to this, with mega-corp-farms and what-have-you... but that's not who we're talking about here.
- maxerickson 10y ago
  The federal estate tax on a $6 million farm would be roughly $200,000. You don't need to be making enormous profits to plan for that. You'd certainly need to be making a decent return, but it doesn't take such a huge amount of annual profit to set aside enough to cover it. What you seem to be missing is that I am really skeptical that people are gathering $6 million of paper wealth without plowing hundreds of thousands of dollars of profits into growing their operations. Maybe some unlucky lucky guy inherited a lot of land that then appreciated a great deal. The horror.
  - AnimalMuppet 10y ago
    If I understand correctly, it's more like this. You make $50,000 in a good year. When you have to plow money into the operation, you borrow the money to do it. You're able to make payments on this, and that's about all. Putting aside $200,000 in that environment would be pretty hard.
    - maxerickson 10y ago
      How does such a bleak operation get so big?
      - AnimalMuppet 10y ago
        Because all the smaller ones couldn't make it. If you only had $2 million in value, you were making less than $20,000 a year, and couldn't support a family at all. (All numbers are made up, but I think the order of magnitude is about right.) So the people with operations that size sold out, and others borrowed money to buy that land, so that they could get up to the level where they're making $50,000 a year and can support a family. (They were able to borrow money on the land, because despite 2008, farmland has not been decreasing in value - or at least not much, so banks are willing to make the loan, because they have good collateral.) That's the mechanics of how they got that big. As for the "why would rational people ever take that deal" question, I think it's because some people really feel an attachment to the land, to the lifestyle, to the ideal of a family farmer, to family tradition, or some combination thereof.
        maxerickson 10y ago
        The table "Principal farm operator household finances, by ERS farm typology, 2015" here provides a slice of information: https://www.ers.usda.gov/data-products/farm-household-income-and-characteristics/ https://www.ers.usda.gov/data-products/farm-household-income... Many farmers are making small amounts or losing money. They appear to mostly have farm assets less than $1 million. But when you get to the commercial class (still households), with median farm assets of $2.7 million, they are making median farm income of $146,000; with mean farm assets of $4.1 million, they are making mean farm income of $250,000, which is not the 1% of assets you propose. There is of course much room for variation inside the data, but it appears that many large farms are able to generate a nice return on assets, even at farm sizes smaller than would be subject to current estate taxes.